Why your GDP hate is misplaced

When it comes to economics the one single issue that seems to get everyone in a room in agreement is that GDP is trash.  Here is a transcript from a typical conversation between me and an individual who hears I’m an economist:

Individual: “You are an economist!  You must agree that GDP is crap.”

Nolan: “Ahh well, ummm, what question are you asking?”

Individual: “What, it is just crap though, you must agree that it is rubbish”

Nolan: “Well it depends on your question, why are we measur …”

Individual: “Come on, it is just rubbish, everyone agrees it is rubbish.  I mean we care about so many other things”

Nolan: “Ahh so your question is about what we should value. Ok yeah it doesn’t measure all social value but …”

Individual: “Yeah, it’s rubbish, exactly”

I don’t have enough fingers and toes to count the number of times I’ve had this conversation – but in truth GDP is really good at measuring what it is supposed to measure … the problem is that people keep using it as a measure of something else.

But it is hardly the individual’s fault that they have come to this conclusion.  Decades of GDP fetishisation by policy makers combined with economists who spend more time talking about (and in the extreme teaching) the shortcomings of GDP than actually teaching what GDP is supposed to measure has provided this great rule of thumb that people follow to understand what is going on.

So in this post let me do something novel – let me stand up for GDP.

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Scope of blog posts – question everything

Proper posting starts next week but before we start I just want to outline the broad scope, but narrow method, of the posting that will occur here – and hopefully the critical comments of other people will follow the same idea when discussing these things.  Essentially let’s cover all sorts of social and economic issues based on two factors: questioning and understanding the context of the received wisdom that underlies them.  In this way, each post should start with an idea that some group accepts as true, and needs to both critique that but also understand the underlying concern or situation that led to that idea gaining traction.

Coming back to reading the news of the day I’m struck by how much “received wisdom” there is out there.  I know I used to complain about it and state that economists should be careful about how their simplifications could be taken as received wisdom, but to be honest I’d forgotten quite how extreme it is.

Now this may be all well and good but it isn’t how I like to think about economic and social issues.  Instead I like the idea that a good way to look at these questions is to be a bit of a child:

A good economist is like a petulant child.  They always ask why, never fully accept an answer, and rarely fully reject one.

All of us sitting here on our computers intend to be good economists, and this blog is a space where we can practice the art – asking ourselves whether the received wisdom we rely on to reach our conclusions about certain social and economic policies is really defensible.  But critique alone isn’t as useful as I used to think – we also need to ask why the received wisdom is accepted in order to understand where legitimate concerns regarding trade-offs exist.

I have noticed discussion of New Zealand’s “poor productivity performance” (among other things) here.

I have noticed the statement that people now are worse off than their parents (here and here).

I keep hearing that wages aren’t going up in New Zealand – a statement I find particularly surprisingly given that I have been sitting around in a dark room with the evidence of rising wages for several years.

Now each of these statements comes from something.  Productivity, the progress of generations, and wage growth are all short hand things that are used to define progress (assuming of course no trade-off) and a belief in their absence indicates that individuals in society are concerned about social and economic failure.

However, to a particular group each of these is a received wisdom that can be dropped in conversation.  The economist or policy analyst will use the first to signal to other economists that they know what productivity is.  The married couple in their 30s or 40s will use the second to talk to their parents over brunch about how they don’t understand how much harder it is for them than it was for the baby boomers.  The third is used by people the whole economy over to complain about how they should be paid more for the day they spend surfing facebook and commenting on stuff articles.

My cynicism aside, each of these pieces of received wisdom both includes true information in the context it was noted – and misleading information that is being used to support a set of beliefs for some group.

Take wage growth as an example.  During the Global Financial Crisis there was evidence wage growth was weak – in fact there are periods where wage growth will slow which demand explanation (including during 2017).  However, this is not evidence that wages are always and everywhere too low.  Real wages in New Zealand have grown persistently through time … if this is contentious to someone then don’t worry, this will be covered eventually.

Going forward lets evaluate some of these ideas on the blog.  We can try to figure out the context where they are useful – and the context where they are misapplied.  Uncomfortable statements for this wisdom such as “if lower productivity is a choice is it really bad” and “millennials in NZ are fundamentally wealthier in terms of goods and services than baby boomers were” can be placed alongside the nuggets of truth such as “lower productivity due to some group protecting themselves (poor competition) is a failure” and “many millennials are excluded from some things, such as access to the security of owning a house, that baby boomers weren’t”.

Received wisdom is there for a reason – and we should be keen to find out what people may be concerned about rather than ignoring it.  However, this does not mean that we should take received wisdom as given – since out of context it is often simply false statements used by a group to try to get something.

Lets do this.

Back in business

Hello internet!  If anyone is still following this site, which undoubtedly looks dead, I’d like to give you a shout that regular posts are on their way back.

First can I say, WTF has been happening in the world since I wandered away from the computer.  I stop keeping tabs on economic and political news for a couple of years and the world has completely changed … I just don’t even have the words.

I never meant to stop posting, hence why there was no farewell post.  However, my attempts at writing a PhD thesis got in the way of any other sort of reading or writing – and as a result I was both short of content and shorn of the capability to write even poor attempts at blog posts.  Similarly the other brave writers of TVHE found life getting in their way – our common group emails even became a rarity over this period something we all bemoaned!

However, now I’m back to adding some content on here – but I’ll have to give a few notes:

  1. The plan is to only post once per week until I find my feet a bit more – I still have a lot of balls in the air (the thesis isn’t submitted yet and I’m organising work) and don’t just want to provide single links with a one line comment when I do post.
  2. On that note I will be hoping that, if anyone is around, they will be comfortable adding comments.  I do this for the conversation about economics – not because I have any amazing insight.  If people are keen for us to bounce ideas off each other then this blog can get back rolling.
  3. I will be staying away from the TVHE twitter as I have for the last 3+ years (although these posts will be linked there automatically I hope – so keep following).  Twitter became toxic in 2014 and appears to have just become more of a cesspool since – I want to discuss economic ideas and arguments, not deal with traded insults.  If someone can convince me to come back then I may change my mind.
  4. I will NOT be blogging on my specialisation (analysis of income inequality) in detail until I’ve defended my thesis – that is months away still.  There will be outline posts, but I will steering away from to much detail at first.
  5. I have been lecturing entry level economics, and giving a few lectures on economic modelling, since I have been away.  Content related to this is likely to turn up.  Specifically, I would like to create content to share with my students – this semester is macroeconomics, so I may be going back to macro for a bit.
  6. After a few months I will be looking at running some ideas past anyone who turns up to read these posts – I would like some more interactive discussion of economic topics as related to New Zealand without the external pressure that exists to advocate.  Lets talk economic concepts and try to really understand the trade-offs that exist in New Zealand.
  7. If you have some excellent recommendations for books to review hit me up.

If you want to see some of the output from my thesis take a look here for working papers.  If this is an area you have done research and you want to critique my thesis that is cool, just give me a yell.  If you are reading this post that’s cool, leave a comment about a social issue you would like covered in New Zealand that fits within the 5 W and an H framework of economics.  I promise to do my best to describe as much as possible without reaching any conclusions.

Top 10

On Friday I gave interest.co.nz a Top 10 which, in a sense, considered trade, immigration, and social policy – at least in terms of some of the principles we used to discuss trade-offs.  Go over and give it a crack 😉

Pre-distribution and Post-distribution

Note: This is an outline of thoughts rather than some type of persuasive argument – in time I should make an effort to flesh out all the little bits in this, but it is just a run down of my current general thoughts.  Take it as such and feel free to provide constructive feedback 😉

Anyone who reads this who also read my writing pre-2014 will remember that I was a strong post-distributionalist when it comes to social insurance policy.  To the point where the term pre-distribution (or predistribution) did not appear on TVHE when I did a search.

Since then the economic environment has changed and I have spent more time considering these issues.  So have my views changed?  Let’s consider the issue.

Tl;dr No, but I think the terminology can be used more clearly. With regards to redistribution – if our concern is the distribution of income alone pre-distributionalist policies are indirect and inefficient.  But pre-distribution policy prescriptions have relevance when discussing issues of transition – which is essentially insurance from shocks, and the provision of job/income security (as apart from a security net).  Such insurance can be costly, but is still worth discussing in this frame. Furthermore, if we stretch the term pre-distribution far enough it becomes ridiculous – sure the whole study of economics concerns the distribution of income, but the name is used for a subfield for a reason.

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Future of work?

While I have been buried in literature regarding New Zealand’s policy past I have not been paying too much attention to what politicians within New Zealand have been saying.  This has led me to miss the growth in xenophobia in New Zealand – with the suggestion of putting a levy on “foreign workers” now being seen as sensible policy by the Labour party.  This disappoints me greatly, and I am genuinely hurt that society is moving this way over here.

Although growing xenophobia in New Zealand and around the world disappoints me, I struggle to believe it is the result of a truly racist preference.  Instead the growth of, or at very least the perception of, economic insecurity is undermining principles of tolerance.  In that way there is a role for government to improve outcomes – not by attacking other groups – but through its role as the provider of social insurance.

It is in this way that the Labour party’s willingness to discuss the Future of Work is encouraging.  A lack of economic security, both in terms of income and perceptions of status, is one of the key reasons why society coordinates insurance policy through a central government – the scope and nature of this needs to be discussed and evaluated as the world changes.

And in this way the recent NBR piece by Rodney Hide that was approving linked to by David Farrar makes no sense to me.  I don’t disagree that politicians use empty rhetoric – Hide as a former politician has plenty of experience doing that himself.  In fact the article is filled with its own meaningless slogans about wealth generators and needing to be an experienced businessman to discuss industry.

There is a meaningful debate to be had about the nature of social insurance in New Zealand, and the way we help people transition between jobs in the face of technological changes and other changes in the global economic environment.  This is a debate that we ignored in the 1980s and early 1990s which has undeniably hurt certain groups in society.  This is a debate that has been ignored in the UK and US and has led to the election of increasingly authoritarian governments pushing increasingly intolerant policies that the majority feels will give them the security they lack in the labour market.

Morally I have long felt that the Western middle class (myself included) should accept the idea of slower growth in living standards to reduce global poverty – although premised on the idea that there should be more domestic support to helping those who lose from any change to transiton.  But recent elections around the world show they haven’t, and the status costs associated with these changes (and growth in income to the wealthiest in these countries) has led to a backlash.  Not just that, but the changes have occurred in a way that has – for many – undermined economic security.

This is a relevant issue for policy makers and the public to discuss, and making sure we talk about these so that the trade-offs involved are transparent and the value-judgments we are making as a society are clear is essential.  Attacking policy suggestions on the basis that the report is too big and you don’t know what the programs are – like Hide does – doesn’t help.